With the 22 June 2013 deadline for the implementation of the Alternative Investment Fund Managers Directive (Directive 2011/61/EC) (the Directive) fast approaching, fund managers based outside the EU need to consider how prepared they are for its introduction.
The position of non-EU managers has proved to be one of the controversial aspects of the Directive since it was first proposed. Managers established outside the EU need to be aware that unless they take appropriate action, from the implementation of the Directive they will be at a disadvantage to EU managers in relation to marketing in the EU and may find that their access to certain EU markets is entirely shut off.
At the core of the Directive is the introduction of a requirement that all alternative investment funds managers (AIFM) must be appropriately authorised to manage alternative investment funds (AIFs) which are established or marketed in the EU.
Although the Directive will increase the regulatory burden for AIFM, one benefit is the introduction of a European passport enabling AIFM to market the units of the AIF they manage to professional investors throughout the EU. The Directive however provides for a staggered introduction of this passport which threatens to place non-EU AIFM at a disadvantage. While the passport will be available to EU based managers in respect of their EU AIF immediately following the transposition of the Directive on 22 July 2013, an equivalent passport in respect of non-EU managers will not be introduced until 2015.
By July 2015 at the earliest the European Securities and Markets Authority (ESMA) is required to prepare a report detailing its opinion on the functioning of the passporting regime for EU managers and its advice on the extension of the passport to non-EU managers. Within 3 months of receiving this advice, the Commission shall specify a date for the introduction of a passport for non-EU managers (the Extension Date).
For EU managers considering how to prepare for the implementation of the Directive an Irish investment fund vehicle can be a straightforward means of ensuring that they can maintain access to their key markets with the minimum of disruption to their current operations.
Non-EU managers can be divided into two categories for the purpose of the Directive, those managing EU AIF and those managing non-EU AIF marketed in the EU. The residual category of non-EU managers managing non-EU AIF which are not marketed in the EU will be unaffected by the Directive.
Non-EU managers managing EU AIF
From 22 June 2013 to the extension date
During this period, non-EU managers managing EU AIF will not have the option of becoming authorised under the Directive. To continue in their current role they must instead comply with the local rules of the jurisdiction in which the AIF is established. Should they wish to market the AIF they manage within the EU they will only be able to do so in reliance on national regimes and only where the following conditions are satisfied:
they will be required to comply with the requirements of the Directive with respect to transparency and asset stripping;
there must be cooperation agreements in place between the competent authorities in the EU jurisdiction in which they wish to market and the state in which they are established ; and
the state where the manager is established must not be listed as non-cooperative country and territory by Financial Action Task Force.
From the extension date onwards
From the extension date, non-EU managers managing EU AIF will be required to seek authorisation in their Member State of Reference (MSR). A non-EU manager's MSR is the EU Member State with which it is most closely established and must be determined in accordance with detailed rules set out in the AIFMD.
Once authorised, non-EU managers will be required to comply with the full scope of the Directive except: (i) Chapter VI (relating to the rights of EU AIFM to manage and market EU AIF in the EU); and (ii) any provision of the Directive where they can demonstrate that compliance with such provision is incompatible with a mandatory provision of the law to which they are subject and that they are subject to and comply with, an equivalent rule which has the same regulatory purpose and which offers the same level of investor protection.
In addition to the rules applying to EU managers seeking authorisation, non-EU managers must also comply with the following requirements:
they must appoint a legal representative established in the MSR who shall be sufficiently equipped to perform the compliance function pursuant to the Directive and who together with the manager shall be the contact person for the investors in the relevant AIF, for ESMA and for the competent authorities with respect to the activities for which the AIF is to be authorised;
there must be cooperation agreements in place between the competent authorities of the MSR and the state in which the manager is established in order to ensure an efficient exchange of information that allows the competent authorities to carry out their duties in accordance with the Directive;
the country where the manager is established must not be listed as non-cooperative country and territory by the Financial Action Task Force; and
the country where the manager is established must have a tax agreement in place with the MSR which complies with the OECD Model Tax Convention.
Non-EU managers managing Non-EU AIF that are marketed in the EU
From 22 June 2013 to the extension date
During this period, non-EU managers must continue to rely on national regimes to market their AIF within the EU. They must also comply with the conditions detailed above which apply to non-EU managers marketing EU AIF under national regimes.
From the extension date onwards
During this period, non-EU managers managing non-EU AIF will have the following options:
- seek authorisation in their MSR in accordance with the rules set out above; or
- continue to rely on the national regimes.
Any non-EU manager considering relying on national regimes after 2015 should note that 3 years following the extension of the passport regime to non-EU managers, ESMA is required to issue a report to the Commission detailing its opinion on the function of the passport regime for non-EU managers and advising on whether the national regimes should be terminated. In the absence of obstacles being identified by ESMA, the expectation is that the national regimes will be abolished.
Implications for Non-EU managers
These provisions have proved contentious given the disadvantaged position in which they place non-EU Managers by depriving them of the benefit of an EU passport before July 2015 at the earliest.
Prior to the introduction of a passport, the marketing of AIF managed by non-EU managers will depend upon the continued existence of national regimes. Critically however, Member States are not required to continue such regimes and non-EU Managers may find their access to certain markets blocked during this period.
Furthermore, even where national regimes are retained, non-EU managers may find that they are unable to take advantage due to the lack of a suitable cooperation agreement between the relevant competent authorities. Although ESMA's advice to the Commission on the implementation of level 2 measures has provided some guidance, uncertainty remains in respect of the contents of the cooperation agreements which are to be put in place between the competent authorities of member states and third countries. The ESMA advice and the Directive envisage a high level of information exchange and there can be no assurance that the competent authorities of other jurisdictions will be willing to agree to such exchanges of information.
Similarly, following the introduction of the passport, its availability to non-EU managers will be conditional upon a cooperation agreement being put in place between the relevant competent authorities. In addition a tax agreement must also be put in place which may prove to be a practical impediment.
It is apparent that for non-EU managers for whom access to EU markets is important, relying on the above provisions will necessarily result in a degree of uncertainty.
The Irish qualifying investor fund as a solution
For non-EU managers who wish to assure themselves of continued access to EU markets, the Irish qualifying investor fund (QIF) represents an ideal vehicle. The QIF is an Irish regulated fund vehicle which was developed as a regulated platform for alternative investments. The QIF may be marketed to sophisticated investors, has a minimum subscription level of €100,000 and is not subject to investment restrictions (other than the requirement for investment companies to spread risk).
The Directive permits AIF to appoint an external manager or elect to become internally managed. One option for non-EU managers is to establish a QIF and elect for it to become internally managed. As an EU AIFM, the QIF will benefit from the passport provisions immediately on the implementation of the Directive in June 2013.
The QIF may then elect to delegate performance of the asset management and/or risk management function to the non-EU manager. Any delegation arrangements must comply with the Directive which provides that they must receive the prior approval of the AIFM's competent authority. The arrangements must also comply with a number of high level principles which require the delegation to be objectively justified and the ability of the delegate to perform the role to be demonstrated to the relevant competent authorities.
It should also be noted that the AIFM will retain ultimate responsibility for the performance of the delegated functions and its liability towards the AIF and its investors cannot not be avoided or limited. Furthermore, AIFM must not delegate their functions to the extent that it can no longer be considered to be the manager and it becomes a letter-box entity.
This article first appeared on LK Shield Solicitor’s website in March 2012. For more information, please visit www.lkshields.ie.